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SGMZ > SEC Filings for SGMZ > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for SUNGAME CORP


15-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Statement Regarding Forward-Looking Information

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.

Statement Regarding Forward-Looking Information. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words "believe", "expects", "anticipates", "intends", "estimates", "projects", "target", "goal", "plans", "objective", "should", or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, the availability and pricing of additional capital to finance operations.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.

Background

We are an early development stage company. Prior to the merger with Freevi Corporation, Sungame was in the process of establishing a 3D virtual world communities. Sungame (also known as the "Company"), trading under the symbol "SGMZ", is the Company behind the Flightdeck.tv content management and discovery platform. Sungame also uses the brand "Freevi" from time to time as a d.b.a., as it acquired Freevi Corp. and the brand has retained its value sufficient to keep using the brand Freevi. Sungame's mission is simple: to enrich people's lives by becoming a leading social networking, content creation, content discovery and distribution platform. Integral to the site's functionality is a central aggregation engine that excels at serving targeted, focused and high quality content and social medial interactions based on the user's specific interests and past usage history. Other tools available on the website are designed to simplify content creation and distribution for content producers, while providing these artists an engaged audience interested in consuming this content. Sungame is also the Company behind Vidirectory, a video based business directory that simplifies online marketing for small businesses.

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Sungame builds products that support its mission by creating utility for users, developers and advertisers:
[[Image Removed: graphic1]]

Flightdeck

The Flightdeck platform is designed to be a web-based homepage that is able to pull social media, news and content feeds from all over the web into one easy to manage central location. This aggregation of feeds will allow Flightdeck members to integrate all their most important online activities into one completely customizable homepage. The platform's chat functionality is designed to allow users to interact with their user's Twitter and Facebook friends, as they use the platform. Flightdeck will allow users to post content and links to all their social media accounts through a central location inside the website. The platform will enhance user's content consumption experience by layering in unique chat and sharing features, while they watch movies, listen to music or play games.

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Flightdeck is designed to be the ultimate content discovery, distribution and consumption platform. The platform's main differentiation compared to competing platforms is likely to include the platform's multi-medium focus on audio, video, text and social content. The Flightdeck recommendation engine learns from tens of millions of small user interactions, which improves the platform's ability to serve content that is relevant to the interest and taste of the user. Flightdeck's mission therefore is to become the user's central online homepage that they can use to access all their social media and content needs.

Figure 1: Flightdeck landing page

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Vidirectory

Sungame will also offer Vidirectory a business directory service designed to help businesses attract customers to their online and physical by providing increased online visibility under the Company's Vdirectory service offering, Sungame provides both free and paid products to local businesses. Vdirectory will allow businesses to create a free online business account and claim an individual page for each of their businesses locations. With their complimentary business accounts, businesses can view business trends1, message customers2, update information3 and update their product prices and inventory. Premium versions of this directory listing service allows local businesses to promote themselves as a sponsored search result on the shopping platform when users are searching for related product keywords or are visiting related business pages.

[[Image Removed: graphic3]] Figure 1: Vidirectory landing page



1 e.g., statistics and charts reflecting the performance of a business's page on the platform

2 e.g., by replying to customer inquiries either publicly or privately

3 e.g., address, hours of operation

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Platform Features

CENTRAL SOCIAL MEDIA HUB FUNCTIONALITY

Flightdeck's social media aggregation bundles multiple social media accounts into one single channel for each user so everything from Instagram photos, Facebook status updates, tweets and Soundcloud tracks can be found in one easy to access place. The platform's differentiation will lie in its unique user experience, which will allow users to chat, share and consume content at the same time.

THE FD POST

The platform allows users to simultaneously broadcast updates to multiple social media websites without ever having to leave the platform. The feature will allow users to significantly streamline their sharing, communication and networking activity across social media platforms. This will allow user and content producers to post content to their Facebook, Twitter, LinkedIn and other social media accounts with a single click of the button.

[[Image Removed: graphic4]]

Figure 3: Social network feeds

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USER PROFILING AND CONTENT DISCOVERY

The Flightdeck system has been built to offer users seamless content discovery through automatic interest and past usage analysis and profiling. The Flightdeck user profiling system allows the end-user experience to transition from having to search for the content they are looking for to a more organic and natural "curated content" strategy, where the user is exposed to relevant content and social media interactions automatically.

VILLAGES

Flightdeck will feature a community discussion board or a villages feature designed to discuss, collaborate and fund creative projects together. All users are able to apply to become members of different villages or creative projects, where they can contribute by either funding or volunteering for projects. This will allow users and content producers to connect and make creative projects happen.

SHARED ECONOMY

The Company will actively incentivize user engagement, usage and referrals through the use of its virtual currency system. Users will be able to either redeem these points for cash, through licensed debt cards, or use it to purchase the different content as well as fund other user's creative projects. This virtual system will also provide independent artists a way to monetize the content they produce.

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Figure 4: Shared Economy Wallet

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Business Model

Flightdeck will generate revenue by monetizing both individual users and businesses. In regard to individuals, revenue will be generated through banner and video advertising, as well as the profit share deriving from our apps store. In regard to businesses, Sungame offers the possibility of inclusion in its database and platforms with both Free and Premium offerings.

[[Image Removed: graphic5]]

Figure 5: Sungame's business model

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Value Proposition

Flightdeck's primary value proposition is its [[Image Removed: graphic8]] successful functional integration of video streaming, social media, shopping and apps into one easy to use platform.

Access to high quality and original content will increase the longterm customer value and increase unique visits, and engagement of the platform's users. The platform's recommendation engine is expected to significantly streamline the content discovery process and increase consumption of high quality targeted content.

The platforms will also generate significant user interest by monetizing and rewarding users based on their engagement and usage of the website. This will provide users a strong economic incentive to use the website over other competing platforms. Developed with a content creator centric approach, Flightdeck will provide content producers a revenue sharing deal that is significantly better than agreements other larger content sites offer their content creators.

Access to a large number of engaged users will allow the platform to connect these users with small businesses through its Vidirectory service. The service will allow these businesses a proven video-based online marketing strategy at an affordable price.

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Future developments

Although a growing number of users is without question the most relevant Company goal in 2013, Sungame's team and its endless desire to grow and expand has already set up a few more objectives for the near term.

The first would be to make Sungame's service available on mobile and tablet devices. The incredible growth in these segments of the market speaks for itself and Sungame wants to take advantage of a large potential adoption in that market.

[[Image Removed: graphic11]]

In addition, the team is investigating the feasibility of releasing an innovative Sungame -branded tablet, The team has been working on licensing the business line of the device and recently could appreciate the output of the hard work with a prototype device that exceeded any expectation. The tablet has not officially been presented, but it is thinner than any other 7" tablet on the market and allows for 3D vision without the use of any kind of glasses.

Upon further understanding of the economics of these new products and services, as well of its distribution strategy, the Sungame team will promptly take action to present and exploit these new opportunities.

[[Image Removed: graphic12]]

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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2013 (Q1 2013)
COMPARED TO THREE MONTHS ENDED MARCH 31, 2012 (Q1 2012)

Revenues

For the three months ended March 31, 2013 we generated revenue of $110 compared to $10,265 for the three months ended March 31, 2012. The decrease of $10,155 is due to the Company's decision to discontinue its social media consulting services for Vidirectory.com.

Operating Expense

Operating expenses for the three months ended March 31, 2013 were $185,394 compared to $171,082 for the three months ended March 31, 2012. This net increase of $14,312 was due to increased rent of $4,337, increased legal fees of $2,912, and increased consulting costs of $35,763 offset by a decrease in salaries and benefits of $32,772 during the three months ended March 31, 2013 versus the same period in the prior year.

Other Income

We received miscellaneous income of $5,000 during the three months ended March 31, 2013.

Net Loss

The net loss for the three months ended March 31, 2013 was $181,129 compared to a net loss of $161,203 for the three months ended March 31, 2012. The $19,926 increase in net loss is directly attributable to the decrease in revenue and increase in operating expenses described above. As of March 31, 2013, we have an accumulated deficit of $1,890,257.

Net Loss Applicable to Common Stock

Net loss applicable to common stock was $0.00 for the three months ended March 31, 2013 and $0.00 for the three months ended March 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2013, we had cash on hand of $11,732 and total assets of $147,995; consisting of cash of $11,732, net fixed assets of $505 and capitalized software of $105,758. At March 31, 2013, we had total current liabilities of $2,142,972; consisting of $269,574 of accounts payable, short-term notes payable of $40,000 and related party advances of $1,833,398. At March 31, 2013, we had a working capital deficit of $2,184,704.

During the three months ended March 31, 2013, cash used in operating activities was ($198,451) compared to ($137,064) during the three months ended March 31, 2012. The increase is primarily due to the increase in net loss of $19,926 and an increase in prepaid expenses of $30,000 for expenses of the second quarter 2013 which were paid in advance for the three months ended March 31, 2013 versus the same period in the prior year.

During the three months ended March 31, 2013, investment in capitalized software was $0 compared to $37,980 during the three months ended March 31, 2012. During the three months ended March 31, 2013, we increased our advances from related parties by $167,579 in financing activities. During the three months ended March 31, 2012, we increased our related party advances by $167,627 in financing activities.

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Outlook

The United States has been experiencing a widespread and severe economic recession that, among other things, has reduced availability of credit and capital financing and heightened economic risks. We have been grossly undercapitalized in 2013 and unable to raise a significant amount of capital, other than receiving $167,579 in advances from our majority shareholder.

The continuing effects and duration of these developments and related uncertainties on the Company's future operations and cash flows cannot be estimated at this time but likely will be significant, and in its audit report on our consolidated financial statements, our independent registered accounting firm has expressed substantial doubt as to our ability to continue as a going concern (see Note 3 to our consolidated financial statements).

We presently are unable to satisfy our obligations as they come due and do not have enough cash to sustain our anticipated working capital requirements and our business expansion plans for the remainder of 2013. Subject to unforeseen effects of the economic risks and uncertainties discussed in the foregoing paragraph and to our ability to raise working capital, we expect to continue for the remainder of the calendar year 2013 to incur expenses related to software development. The further delay of the rollout of our virtual world products, will have material adverse effects on our cash flow, results of operations and financial condition including significant uncertainty as to our ability to continue as a going concern. No assurance can be given that we will be able to secure any third party financing or that such financing will be available to us on acceptable terms.

Given the current financial market disruptions, credit crisis and economic recession, it is difficult at this time to obtain any third-party financing on acceptable terms, whether public or private equity or debt, strategic relationships, capital leases or other arrangements. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restricting covenants. Strategic arrangements, if necessary to raise additional funds, may require that we relinquish rights to certain of our technologies or products or agree to other material obligations and covenants.

We cannot provide assurance that the market will ever accept our products and services. Any failure by us to sell our products and services within our expected schedule or on terms acceptable to us will likely have a material adverse impact on our cash flow, results of operations and financial condition. In addition, we expect to face competition from larger, more formidable competitors as we enter various markets. A lack of market acceptance, failure to obtain additional financing, or unforeseen adverse competitive, economic, or other factors may adversely impact our cash position, and thereby materially adversely affect our financial condition and business operations.

We anticipate funding operations through private investments and loans made by our current shareholders. However, we have no commitments for such funding as of the date of this report. In addition, we anticipate generating revenue in the near future, however, we have no current commitments or contracts that could result in such revenue. Management will have complete discretionary control over the actual utilization of said funds and there can be no assurance as to the manner or time in which said funds will be utilized.

We foresee that we will need a minimum of $1,500,000 to fund our operations for the next 12 months as follows:

              System Development and Integration         $   700,000
              Professional Fees                          $   100,000
              Sales, Marketing, Strategic Partnerships   $   100,000
              General & Administrative                   $   500,000
              Working Capital                            $   100,000
              Total                                      $ 1,500,000

We will need substantial additional capital to support our proposed future operations. We have no significant revenues from operations. We have no committed source for any funds as of the date hereof. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales or royalty income, and could fail in business as a result of these uncertainties.

Because of the limited financial resources that we have, it is unlikely that we will be able to diversify our operations. Our probable inability to diversify our activities into more than one area will subject us to economic fluctuations within the virtual world industry and therefore increase the risks associated with our operations due to lack of diversification.

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We anticipate generating the vast majority of our revenues from our advertisers. Advertisers can generally terminate their contracts, at any time. Advertisers could decide to not do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to advertisers, they may stop placing ads with us, which would negatively harm future revenues and business. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Any decreases in or delays in advertising spending due to general economic conditions could delay or reduce our revenues or negatively impact our ability to grow our revenues.

In the event we are unable to achieve additional capital raising through future private or public offerings, we will limit operations to fit within our capital availability. In such event, we will probably seek loans for operating capital. We have not achieved any commitments for loans from any source. In any event our business can be operated with a skeleton staff and have limited advertising/marketing budget, which could cause us to remain unprofitable and eventually fail.

Going Concern

The independent registered public accounting firm's report on our financial statements as of December 31, 2012 and 2011 includes a "going concern" explanatory paragraph that describes substantial doubt about our ability to continue as a going concern.

We are dependent on raising additional equity and/or, debt to fund any negotiated settlements with our outstanding creditors and meet our ongoing operating expenses. There is no assurance that we will be able to raise the necessary equity and/or debt that we will need to be able to negotiate acceptable settlements with our outstanding creditors or fund our ongoing operating expenses. We cannot make any assurances that we will be able to raise funds through such activities.

Capital Resources

We have only common stock as our capital resource.

We have no material commitments for capital expenditures within the next year, however, if operations are commenced, substantial capital will be needed to pay for software development, possible acquisitions and working capital.

Need For Additional Financing

We do not have capital sufficient to meet our cash needs. We have not generated revenue and have minimal resources to conduct planned operations. We estimate that our monthly expenses to commence planned operations within the next 12 months are approximately $125,000 (approximately $1,500,000 per year). Thus, using currently available capital resources (the primary source of which is non-binding commitments and expectations from management and current shareholders), we expect to be able to conduct planned operations for a minimum period of 3 to 4 months. We are currently relying solely on current shareholders and management to provide the necessary funds to continue operations. We do not have any commitments for such funding from shareholders or management.

At the present time, we have not made any arrangements to raise additional cash. Management and current shareholders are expected, but have not committed, to provide the necessary working capital so as to permit us to conduct planned operations until such time as we have begun to generate revenue and/or have become sufficiently funded. However, if we do not begin to generate revenue or cannot raise additional needed funds, we will either have to suspend development operations until we do raise the funds, or cease operations entirely.

In addition, the United States and the global business community is experiencing severe instability in the commercial and investment banking systems which is likely to continue to have far-reaching effects on the economic activity in the country for an indeterminable period. The long-term impact on the United States economy and our operating activities and ability to raise capital cannot be predicted at this time, but may be substantial.

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Critical Accounting Policies

We have identified the policies below as critical to its business operations and the understanding of our results from operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect our reported and expected financial results. Note that our preparation of this document requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of expenses during the reporting periods. There can be no assurance that actual results will not differ from those estimates. During the three months ended March 31, 2013, there were no significant changes in our critical accounting policies and estimates. You should refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012 for a more complete discussion of our critical accounting policies and estimates.

Risks and Uncertainties

We operate in an emerging industry that is subject to market acceptance and technological change. Our operations are subject to significant risks and uncertainties, including financial, operational, technological and other risks associated with operating an emerging business, including the potential risk of business failure.

Software Costs

The costs for internal use software, whether developed or obtained, are assessed to determine whether they should be capitalized or expensed in accordance with American Institute of Certified Public Accountants' Statement ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for . . .

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